Bailout ‘exit’: a return to sovereignty or Troika rule by another name?

With the government preparing to milk the 15 December ‘exit’ from the bailout, hyperbole is being heaped upon hyperbole to welcome the ‘return of sovereignty’ to Ireland. The government, and in particular the Labour Party, want to use this supposed success story and the good mood it creates to carry them through the difficult local and European elections next May. What is the reality of this ‘exit’ and the true state of democratic control by people in Ireland over economic and other policies?

This paper is written to provide facts to counter the propaganda. Set out below is the reality,economically and politically, of ‘post-bailout’ Ireland. It is an economy destroyed through the imposition of savage cuts and taxes in order to pay bondholders, burdened by an unsustainable level of debt and faced with a continuation of austerity for the next number of years. Politically and democratically, the overlords of the Troika are simply swapped for the strait-jacket of the post-bailout surveillance, the Fiscal Treaty, Six-Pack and Two-Pack. Life, unfortunately, in terms of economic reality and democratic rights, will continue as it has over the years of the bailout. Without a struggle for radical socialist change, this is the new normal facing tens of millions of people across Europe.

This short paper has two parts, one dealing with the economic reality and the other dealing with the political and democratic situation post 15 December.

I. Economic Reality

Eager to use Ireland as a ‘good example’ stick to beat the peoples of Greece, Spain and Portugal with, the European Commission has joined in with the Irish government in dramatically overstating the recovery, both in economic statistics and in terms of the impact on people’s lives. Commissioner Oli Rehn has, for example, said that Ireland:

“provides clear evidence that determined implementation of a comprehensive reform agenda can decisively turn around a country’s economic fortunes and put it back on a path of sustainable growth.” 1

A more sober analysis can be seen from Nobel Prize winner, Joesph Stiglitz who said:

“You have reason to celebrate for not being under the thumb of the Troika, but I don’t think that anybody thinks that you’re back to robust recovery, nobody thinks that Europe is really doing well.”2

GDP Growth

The economic figures back up Stiglitz’s scepticism. GDP growth this year is predicted by the European Commission to be 0.3%.3 This compares to forecasts of growth for 2013 of 1.1% in the autumn 2012 forecast4 and of 2.3% in 20115. Next year, growth of 1.7% is predicted, while for 2015, 2.5% is predicted. This is nothing new – substantial growth has consistently been two years away. The problem is that it never arrives and there are no indications that it will this time either.

Investment

The fundamentals of the Irish economy, far from being strong, are weak. Investment is at an all-time low. Gross Capital Fixed Formation in 2012 was €17.4 billion, down from €48.5 billion in 2007, a collapse of 65%.6 As a percentage of GDP, it is at 10.6% – the lowest rate in the European Union, which has an average of just under 20%. The IMF projects that in this regard Ireland will continue to be bottom in the EU up until 2016.7 What’s more, it is so low that the rate of depreciation is higher than the rate of investment, meaning the capital stock in the economy is diminishing.8

Domestic demand, exports

Domestic demand is extremely weak, with personal consumption of goods and services down 12% since 20089 having been pummelled by a policy of ‘internal devaluation’ combined with high levels of unemployment. Exports have stuttered, despite the increased relative competitiveness of the Irish economy, as a result of the global crisis. According to the Central Statistics Office, in relation to goods exports for example, “[c]omparing September 2013 with September 2012, the value of exports decreased by €118 million (-2%) to €7,346 million.”10

Unemployment

While the recent decrease in those out of work is positive, it should not mask the ongoing crisis levels of unemployment. The seasonally adjusted unemployment rate is still at 12.5%.11 The youth unemployment rate is almost 30%, despite 125,000 people under the age of 25 emigrating since the start of the crisis.12 We have the highest net rate of emigration in all of the EU.

Debt

2013 is a pivotal year for the sustainability of the Irish national debt. It is at 125% of GDP13 and is due to begin to decline this year to less than 100% by 2020, as a result of achieving a primary budget surplus and envisaged economic growth. However, the annex on ‘Debt Sustainability’ of the Commission’s Spring 2013 Review of the Economic Adjustment Programme14 illustrates how fragile this perspective is.

The baseline scenario foresees the debt to GDP ratio dropping below 100% by 2020. However, a more negative scenario, seeing a 1% lower than expected GDP growth would see that ratio just dropping below 120% by 2020. If growth was to be more than 1% lower than forecast, that ratio could remain at 125% or even rise further. This is not outlandish, given that economic growth has consistently and significantly underperformed the Commission projections.

In this scenario, Ireland could well find itself locked out of the financial markets in the second half of 2014 and faced with a choice of returning to a ‘bailout’ or engaging in debt repudiation.

Social impacts

The other economic and political factor that must be borne in mind and is ever present is the prospect of another turn in the saga that is the Eurozone crisis which could be unleashed at any time by political or economic developments, which would have major implications for the Irish economy. It is quite possible that Ireland will be forced back into another so-called bailout programme after the elections next year.

None of this is to speak about the horrific social impacts of six years of austerity – public services have demonstrably worsened, poverty and homelessness have risen dramatically. These continue as a scar on Irish society, caused by the imposition of devastating levels of austerity.

The idea that Ireland can easily return to a path of significant growth is significantly undermined by the on-going severe weaknesses in the domestic economy combined with the on-going European crisis. The Troika diktats bear a large degree of responsibility for this. What we are likely to be looking at, if we continue with the model of neo-liberal capitalism, is a decade of austerity or more, with stagnation or low levels of growth at best.

II. Return of economic sovereignty?

We are told that the Troika is leaving and Ireland has regained its economic sovereignty. Michael Noonan stated that “there is not much point in having political freedom if you do not have economic and financial freedom.” 15

Yet political, economic and financial freedom will not arrive on 16 December. The European laws that the government has supported will continue to require the imposition of yet more austerity. A large degree of power about budgetary and economic policies will continue to rest with the unelected European Commission. The rule of the institutions of the Troika will continue through an array of different mechanisms.

Post-programme monitoring

The Troika itself will not actually exit on 16 December. It will continue a rigorous so-called ‘post-programme surveillance’ of the economy, including formal inspections and power to recommend policy. This will take place under two guises.

(i) IMF Post-Programme Monitoring

After the ‘bailout’ formally ends, Ireland will be part of an IMF process called ‘Post-Programme Monitoring’. The exact character of this surveillance will be discussed on 13 December.16 However, based on the experience of other countries, it will involve two so-called “monitoring Board consultations” a year. This will continue until the amount outstanding to the IMF drops below 200% of the Irish quota of the IMF (Irish quota is 1,257.6 million Special Drawing Rights – equivalent to around €1.2 billion). This means it will apply until the amount owed drops to below €2.4 billion.

(ii) Post-Programme surveillance by the European Commission

Under Regulation 472/201317, one of the so-called ‘two-pack’, post programme surveillance will be carried out by the Commission. The details are set out in Article 14 of the Regulation. It involves “regular review missions” to Ireland by the Commission and an assessment of whether “corrective measures are needed.”

The Commission may then make a proposal to the Council to make a ‘recommendation’ to Ireland, which will be deemed adopted unless a qualified majority rejects it (the reverse qualified majority). These recommendations can be made public. This also involves supervision by the European Central Bank. This surveillance will continue “as long as a minimum of 75% of the financial assistance received from one or several other Member States, the EFSM, the ESM or the EFSF has not been repaid.”

The new ‘economic governance’ architecture

Ireland, as every other country in the EU, is now subject to the new ‘economic governance’ architecture, created by the ‘Six-Pack’, the ‘Two-Pack’ and the Fiscal Treaty. The process of the implementation of these measures can be best described as the implementation of authoritarian neo-liberalism. The effect overall has been to transfer significant power from elected national governments to the unelected European Commission. Their impact means that talking about sovereignty, in terms of the right of a people to elect a government to decide on economic policy, bears less and less of a relationship to reality. Commission President Barroso has summed up this process as “a silent revolution in terms of stronger economic governance by small steps.”18

(i) Excessive Deficit Procedure

Ireland, together with 16 other countries, is part of the ‘Excessive Deficit Procedure’, as a result of a Council decision of 27 April 2009.19 The EDP has been strengthened by the Six-Pack and the Fiscal Treaty. The most important elements of these relate to the necessity to reduce the deficit and the debt to GDP ratio.

Article 5 of the Fiscal Treaty sets out that a country:

“that is subject to an excessive deficit procedure under the Treaties on which the European Union is founded shall put in place a budgetary and economic partnership programme including a detailed description of the structural reforms which must be put in place and implemented to ensure an effective and durable correction of its excessive deficit.”

If a country fails to rapidly reduce its deficit, the Commission may make a proposal to the Council to make a ‘recommendation’ to Ireland to do so. Failure to comply with the recommendation within six months (or three for a serious breach) can result in sanctions. This will firstly take the form of a non-interest-bearing deposit of 0.2% of GDP. This can then be converted into a fine, which could also be increased. That would be around €300 million for Ireland. These decisions are made through the ‘Reverse Qualified Majority’ voting method, which makes it extremely difficult for countries to stop these recommendations and sanctions passing.

In addition, Ireland will be obliged to reduce the excess of its debt over 60% of the debt to GDP ratio by one twentieth per year from 2018 (three years after the envisaged exit from the Excessive Deficit Procedure). If Ireland then had a debt to GDP ratio of 120%, it would mean reducing that rate by 3% of GDP per year. If economic growth does not materialise, this will be a demand to transfer yet more billions to bondholders. It would result in payments of around €5 billion a year to bondholders if there was no growth.

(ii) Macroeconomic Imbalance Procedure

This is another mechanism introduced by the ‘Six-Pack’ Regulations 1176/201120 and Regulation 1174/2011.21 This introduces a ‘scoreboard’ procedure on a significantly wider range of factors than the debt and deficits examined under the Stability & Growth Pact. The indicators can be changed over time by the Commission, but for now include, amongst others, changes in the nominal unit labour cost, the net international investment position, changes in export market shares, private and public debt and the unemployment rate.

Again, recommendations can be made by the Council to the country concerned and can result in the country entering the Excessive Imbalance Procedure which can once more lead to a fine, this time of 0.1% of GDP.

(iii) Structural Deficit target

The Fiscal Treaty23 introduced a new target of a ‘Structural Deficit’ maximum of 0.5% for countries with a debt to GDP ratio in excess of 60%. That Treaty required the implementation of an automatic ‘correction mechanism’ in national law in the event of exceeding that Structural Deficit target, which in Ireland was implemented by the Fiscal Responsibility Act 2012.24 This Act itself gives power to decide on the need for a correction to the Commission. Article 6 states:

“If the Commission addresses a warning to the State under Article 6(2) of the 1997 surveillance and coordination Regulation or if the Government consider that there is a failure to comply with the budgetary rule which constitutes a significant deviation for the purposes of Article 6(3) of that Regulation, the Government shall, within 2 months, prepare and lay before Dáil Éireann a plan specifying what is required to be done for securing compliance with the budgetary rule.”

This plan should: “specify the size and nature of the revenue and expenditure measures that are to be taken to secure such compliance”. This restricts the ability of future governments to engage in deficit spending, relying on a measurement which Davy Stockbrokers described as “an abstract economic concept that cannot be observed with certainty.”25

(iv) European Semester

The European Semester is a means by which all EU countries, regardless of whether they are in an Excessive Deficit Procedure or not, have their budgets monitored by the European Commission and Council. The Semester has been strengthened by the Two-Pack regulations.

A common budgetary timeline now exists for all Member States. This requires all governments, in advance of discussions in national parliaments on budgets, to submit their stability and convergence programmes and national reform programmes to the Commission and Council by the end of April. The Commission then writes draft recommendations on these, which are amended and adopted by the Council and expected to be taken on board by the government in question. The Commission can also request a “revised draft budgetary plan”. This is a means by which political pressure is placed on governments, generally to go further with neo-liberal counter-reform measures.

Only after this process are the budgets then discussed in national parliaments before being agreed on 15 October.

(v) Contractual Arrangements

The latest planned addition to the economic governance architecture is a ‘Competitiveness Pact’, which will be further discussed at December’s European Council meeting and will likely be agreed in early 2014. The centre-piece of this pact will be ‘contractual arrangements’. This is an idea that has been heavily promoted in strategic documents of EU leaders over the past year, for example in Van Rompuy’s paper Towards A Genuine Economic and Monetary Union.26

These will be contracts between member states and the European Commission and/or Council to agree to “structural reforms”, for example pension reform or the increased flexibility of labour markets. This is again designed to be a way to subvert democratic wishes, as they will not only bind the government which signs the contract, but instead will bind the state, regardless of the wishes of the people as expressed in election results. This is as far as EU leaders feel able to go without a Treaty change, and represents another significant step towards “Troika for all” in Europe.

Financial Market rule

In refusing to countenance debt repudiation, the government remains under the thumb of the financial markets. The financial markets are not simply abstract entities. They are made up of bankers, hedge funds and other investors – in other words many of those responsible for the crisis we continue to experience.

In deciding on the interest rate that the Irish state pays on its debt through the gambling of those buying and selling Irish debt, they retain an essential control over the economy. The fact that the markets did not react negatively to Ireland leaving the bailout without a precautionary line of credit does not show that Ireland has gained it economic freedom. Instead, the way in which the markets are carefully watched tells the real story that they have enormous power. A turn in the Eurozone crisis could turn this into it opposite with the demands of the market used to impose more hardship on the Irish people.

III. Conclusion

All of the promises of what the end of the formal ‘bailout’ will bring are empty. Meaningful economic recovery remains illusory and without a radical change in economic policies and rejection of austerity, will stay that way. The power to decide on economic policies will remain out of the democratic control of the majority, with significant power resting with the European Commission in particular. Ireland post-bailout will still be subject to rigorous ‘surveillance’, it will be subject to austerity diktats under the Excessive Deficit Procedure and will be liable to fines if it chooses not to obey. This is not economic sovereignty.

Of course, all of this has only happened because the Irish government and right-wing governments across Europe have agreed to the creation of this austerity straitjacket. A radical Left government with the active mobilisation and participation of people could break these rules. However, the mountain of ‘supervisory mechanisms’ illustrates the extremely hollow nature of the return of sovereignty rhetoric.

About the author:

Paul Murphy is a Socialist Party MEP for Dublin. He has written extensively on the economic governance architecture being created in Europe. In September 2011, he wrote an extensive article on the Irish Left Review site outlining the impact of the six-pack.27 In April 2012, he wrote a pamphlet entitled “Austerity Treaty explained: how it undermines democracy & institutionalises austerity – the socialist alternative”.28 He also presented to the Oireachtas Joint Committee on European Affairs on the question of ”Authoritarian Neoliberalism in the EU.’29

He is available for comment or to write articles. He can be contacted at info@paulmurphymep.eu. His website is www.paulmurphymep.eu.